Pricing contingent claims with credit risk: Asymptotic expansion approach

The pricing problem of credit derivatives has received much attention in the last decade. An important unresolved problem, however, is the pricing of credit derivatives under the general environment in which the interest rate process and the hazard rate process are stochastic. This article addresses the pricing problems of credit derivatives (defaultable bonds, default swaps, and default options) by the asymptotic expansion approach. This approach has only recently been introduced to mathematical Þnance, and it enables us to evaluate credit derivatives under the widely adapted class of models, including the affine structure models. A numerical study has also been presented.